It was a tough year for dealmakers. Inflation, geopolitical tensions, and a lack of liquidity squeezed the mergers and acquisitions market. Global M&A deal volume has declined 36 percent compared to 2021, according to Refinitiv data. All sectors have declined. However, there has been a noticeable rebound in the smallest M&A deals.

M&A for small companies worth between $100 million and 500 million increased by 27 percent in 2022 compared to pre-pandemic levels (2015-2019), according to data published by EY. That’s a noteworthy trend in a year that has seen anemic deal flow.

The EY team believes this trend is sustainable. “We expect to continue to see this strong flow of smaller deals throughout 2023, as CEOs remain cautious as a result of ongoing geopolitical tensions and heightened uncertainty,” says Andrea Guerzoni, EY’s global vice chair of strategy and transactions. “Deal financing challenges on the back of higher interest rates, increased costs of financing, and regulatory scrutiny will also make smaller deals more attractive.”

Tech CEOs are particularly keen on small deals heading into 2023. A recent EY report found that 72 percent of tech CEOs plan to pursue M&A in the next 12 months, compared to an average of 59 percent across all sectors. A significant correction in tech valuations could be the reason for this. CEOs with ample liquidity and cash could use this correction to consolidate their position in the market.

“CEOs are looking to buy or invest in early-stage businesses to enhance their existing portfolio, access new talent, or create new business platforms,” says EY’s Guerzoni.

A similar trend is emerging in the energy sector. Andrew Dittmar, director at energy analytics firm Enverus, sees an opportunity emerging in small-cap oil and gas stocks. “There is currently a large gap in the valuations of large-cap and small-cap public E&Ps [exploration & production companies],” he says. Dittmar says many publicly-listed small-cap energy companies are also cheaper than their private counterparts. “If this value gap persists, there is room for a return to public M&A activity with large-caps consolidating small-caps.”

EY’s broader outlook on M&A activity in 2023 is mixed. “Stock market volatility, rising interest rates, inflation concerns, and geopolitical uncertainty could restrain the deals market in the coming months,” Guerzoni says. “Despite these challenges, dealmaking should remain at relatively robust levels in 2023.”

Vishesh Raisinghani